Stock surge seen little help to junk; Community Health healthier; MGM slides despite stock jump

By Paul Deckelman and Paul A. Harris

New York, Nov. 24 - The second powerful stock market surge in a row did not provide much help to the junk market, traders said on Monday - pretty much a repeat of the situation on Friday, when equities shot up on news reports, later confirmed, that president-elect Obama had tapped the widely respected head of the Federal Reserve Bank of New York to be his Treasury secretary. On Monday, stocks gained on news that the government would step in to help faltering Citigroup Inc. - but over in Junkbondland, traders said it was largely a non-event, with high yield marketeers for the most part remaining wary about deciding that this would be the panacea everyone's been looking for.

"Too many people have gotten burned" in the past, was how one trader put it.

One name that did benefit from the slightly brighter tone in the junk market was Community Health Systems Inc., whose bonds were seen by many as something of a bellwether for the overall market, because of the issue's great size and liquidity, its widespread distribution - and the ease with which it can be sold by accounts needing to raise cash. The issue got "a nice little pop," a trader said.

But there was no such pop seen in the beleaguered bonds of General Motors Corp., Ford Motor Co., and their respective consumer auto financing arms, GMAC LLC and Ford Motor Credit Co. They continued to languish around recent levels to which they slid, as efforts to bailout the troubled auto giants ran off the road last week and skidded into a ditch.

MGM Mirage's bonds were meantime seen badly on the downside Monday, even though the Las Vegas-based gaming giant's shares jumped nearly 20% in the aftermath of the news announced late last week that Nevada gambling regulators had given the green light for Mideast investment firm Dubai World to more than double its current stake in MGM Mirage. Other gaming credits like MGM's main rival, Harrah's Entertainment Inc., and Trump Entertainment Resorts Inc. were also seen lower.

Primary market activity was again non-existent.

Market indicators mixed

The widely followed CDX High Yield 11 index of junk bond performance, which was up 1/8 point on Friday, gained 7/8 point on Monday, a trader said, quoting it at 72½ bid. 72 7/8 offered. The KDP High Yield Daily Index meantime declined by 9 basis points to 47.33, although its yield actually tightened by 4 bps to 17.43%.

In the broader market, advancing issued trailed decliners by a five-to-four margin. Overall market activity, reflected in dollar volumes, was down about 8% from Friday's pace.

A trader said that from where he sat, "there was no movement in high yield" even as stocks were shooting skyward for a second straight session, finishing with the Dow Jones Industrial Average zooming to 8,443.39, a gain of 396.97, or 4.93%, spurred on by the ambitious federal plan to rescue the troubled Citigroup. Broader market indexes did even better, with both the Standard & Poor's 500 and the Nasdaq composite indexes each up more than 6%. The 891-point climb in the Dow over the last two sessions marked its first two-day advance in three weeks, and the biggest two-day percentage gain since October 1987, when stocks went through historic and volatile gyrations in the wake of the infamous "Black Monday" market crash.

Despite those gaudy numbers, he saw junk little changed overall, predicting that "there's going to be a lag effect," with junk unlikely to blindly follow stocks upward - at least not immediately.

"I think too many people got burned too many times by jumping in too early, thinking that we've hit bottom, and then a week later, they could have bought the same bond five points lower. Just like you should never try to pick the top on the way up, I think guys have learned their lesson, not to try to pick the bottom," an activity he agreed was like trying to catch a falling knife.

"People are concerned that this is another false rally," the syndicate source added.

A second trader said that things were "a little on the quiet side," saying that he saw "a lot of quotes - but not many trades. It was a kind of blah day."

Another trader said that stock surge "really did nothing last Friday or today." He said that overall, "it seemed to me kind of an inactive kind of day." Although some stuff got done, there weren't a lot of people talking about it."

He noted that with the financial markets closed on Thursday for Thanksgiving - sandwiched in between an abbreviated pre-holiday session on Wednesday and another short session on Friday - "I think a lot of people tried to get stuff done last week, and they're not getting a lot of responses today."

He added that "at the open this morning, it felt like it was going to be a real sleeper. More stuff got done than I was anticipating, given the way the market behaved in the morning - but if it doesn't get done [Tuesday], it doesn't get done this week," or this month, for that matter.

However, yet another trader took issue with the assertion of some in the market that "not a lot happened," pointing to the solid rise in the closely-watched CDX index, for instance.

Community Health bonds more robust

Despite the general market consensus that the stock rise did not translate into an accompanying bond surge, here and there there were stronger credits. One of the trader said that for the first time in a while, "a majority of the most actives were actually on the positive side - and we haven't seen that in weeks. The other day, every single one of the actives were down - but today, the majority were up."

One of those was Community Health; a trader said that its 8 7/8% notes due 2015 "popped off Friday's lows pretty well," seeing the Franklin, Tenn.-based hospital operator's paper trade as high as 79 bid, although the bulk of the trading took place in a 77.5-78.5 range, well up from Friday's intraday lows below 76. "They had a nice pop," he declared.

Another trader said that activity in the paper "did pick up today too, because it has been a little bit of a laggard in volume lately."

He saw the bonds reach a final round-lot level of 78 bid, up from 76.5 on Friday, with $17 million of the bonds changing hands.

Qwest, Sprint seen stronger

Another actively-traded gainer he saw was Qwest Corp.'s 8 7/8% notes due 2012; he saw the bonds ending at 81 bid, up a point, on $28 million traded, a figure he called "a little bit surprising," since the Denver-based telecommunications operator's issue normally doesn't trade around that much. He had seen no news that might explain the activity.

From that same telecommunications sector, he saw Sprint Nextel Corp.'s 6% notes due 2016 gain 3 points in round-lot trading, moving up to 53 bid from Friday's 50, on volume of $11 million. However, he saw the Overland Park, Kan.-based wireless operator's most actively-traded issue, the 7 5/8% notes due 2011, end unchanged at 70 bid, on volume of $12 million.

Stock gain fails to boost MGM

On the downside, a trader said that MGM Mirage paper "was down some more today," despite a surge in the company's New York Stock Exchange-traded shares, probably linked to the late-Thursday announcement that Nevada gaming regulators had given Dubai World the OK to more than double its current 9.4% share of the company to 20%. While the approval from Nevada is crucial to the company's plans to expand its current partnership with Dubai World, it is by no means the last word, since Dubai World must win similar approvals from other jurisdictions where MGM Mirage operates.

An official for the Persian Gulf investment concern said that when any acquisitions of MGM Mirage shares would take place would depend on the market. MGM is currently controlled by 52% owner Tracinda Corp., the investment vehicle of nonagenarian billionaire Kirk Kerkorian.

Jim Murren, currently the chief operating officer of MGM Mirage, who will replace long-time CEO Terry Lanni as its chief executive Dec. 1, said partnering with the deep-pocketed Dubai World would help MGM Mirage navigate the current tough economic conditions that have led to a drying up of credit at the same time that visitors to its casinos are way down. The two companies are already jointly building the expansive $9.2 billion CityCenter complex on the Las Vegas Strip, scheduled to open next year.

Even though the shares jumped by $1.72, or 18.38%, to $11.08 - although volume of 3.9 million was about 24% below its usual turnover - the bonds failed to follow suit. The trader said that while he "didn't see a lot trade - they're definitely down."

He saw its 8½% notes due 2010 trading in a range between 53.5 and 55.5, while its 6% notes coming due next October were quoted in the 77 neighborhood, although "it didn't look like that many traded." He also saw its 7½% notes due 2016 and 7 5/8% notes due 2017 were in the 40s.

He said that he "did not really see the '13s that much," but pegged them around the 78 level, "at the lows."

A second trader said that "even with the stock rallying, the bonds remained under pressure. People are still down on MGM debt."

He saw the company's 6 % '09s "still getting hit," falling back to 77.75 bid from Friday levels around 78.5, producing a yield of some 39% for the short-term bond. "It doesn't look like there's much investor confidence there." He said $15 million of the bonds traded.

He also saw MGM's 81/2s down ½ point at 55.5, on $9 million traded, while its 7 5/8s retreated ½ point to 48.5 bid.

A market source at another desk pegged the 6% bonds down as much as 3½ points at 76, although estimating the 81/2s up 1½ points at 55, in active trading. Still another source said the 6s closed at 77, down 1½ points on the day.

Elsewhere in that same gaming sector, another trader meantime saw Trump Entertainment Resorts' 8½% notes due 2015 at 15 bid, 17 offered, "down a couple of points. Small, though."

Harrah's 5½% notes due 2010 dropped 2 points to 47 bid, while Station Casinos Inc.'s 6% notes due 2012 were likewise down a deuce, at 23 bid, and Boyd Gaming Corp.'s 7¾% notes due 2012 were off almost 2 points at 82.5.

Auto bonds still spin wheels

A trader saw General Motors' benchmark 8 3/8% bonds due 2033 trading at a round-lot level of 14, versus 15 on Friday, on $18 million of activity, the most of any GM bond.

He also saw its 7.20% notes due 2011 down ¼ point at 18.75 bid.

The trader saw GMAC's 8% bonds due 2031 unchanged at a round-lot level of 25 bid, and saw GMAC's most active issue, its 6 ¾% notes due 2014, down a point at 30 bid, with $10 million of the bonds traded.

However, he saw GMAC's 7¼% notes due 2011 at 38 bid, actually up 4 points from 34 on Friday, with $6 million traded, exclaiming "go figure - GMAC was all over the place."

Another trader said the GM long bonds "seemed a little weaker" at 14 bid, 16 offered. He saw some trading in the long bonds as low as 13.5 bid, and said that "if they had stayed down there, it would have been pretty ugly."

He did not see much happening with GMAC, with the 8s in a 24-26 range, "about where they had been."

Another trader saw GM's benchmark bonds down 2 points on the day at 13 bid, 15 offered.

Over on the Ford side of the fence, a trader saw the Dearborn, Mich.-based carmaker's 7.45% bonds due 2031 up ½ point in round-lot dealings to 16 bid. He also saw Ford's 7 3/8% notes due 2011 2 points better at 42 bid, while its 7 3/8% notes coming due next October were a point better at 59 bid.

Another trader saw Ford's long bonds at 16 bid, 18 offered, unchanged on the day.

Ford Credit's bonds were seen mixed; while a market source saw its 5.80% notes slated to mature in January at 86.5 bid - 2 points better on the day, though still well under its recent levels above 90 - the credit arm's 7% notes due 2013 were quoted down 4 points on the day at 37 bid. Another market source called the latter bonds 3 point losers, seeing them go out at 38.

Junk financials unaffected by sector gains

While high-grade financial names were being quoted solidly higher on news of the government bailout of a key name in that group, Citigroup, junk-rated financial names lagged, investors hanging back and not looking to hop aboard the bandwagon.

A trader saw Residential Capital LLC's 8½% notes due 2010 unchanged at 27 bid, 30 offered and said its 6½% notes due 2013 remained "pretty much where they were" on Friday, around 8 bid, 10 offered.

He saw MBIA Inc.'s 14% surplus notes due 2033 unchanged at 45 bid, 48 offered.

Another trader saw iStar Financial Corp.'s bonds "a little lower," with its 5.85% notes due 2017 "down a little bit" at 35 bid, 37 offered.

A market source meanwhile called Realogy Corp.'s 10½% notes due 2014 down nearly 4 points on the day at 18 bid.

Among the builders, a trader saw Standard Pacific Corp.'s 7% notes due 2015 quoted at 48 bid, 50 offered, but said there was "not much activity in them." He saw its 6¼% notes due 2014 at 51 bid, 52 offered, also little changed, and apparently not much moved on Friday's warning from a company executive during an investor conference presentation that the Irvine, Calif.-based homebuilder's ability to meet the interest coverage ratio covenant on its credit facility could be undermined in the future if it unwinds a significant amount of additional joint ventures.

Hovnanian exchange expires

Continued market distress, combined with the fact that Monday was the opening session of a foreshortened pre-Thanksgiving week in the United States, kept the primary market quiet, sources said.

Things will remain that way at least until players return from the holiday on Dec. 1, they added.

Instead of new deals, sources are focused on several distressed-type exchange deals in which companies propose to trade out of existing issues at deeply discounted prices in return for new notes with higher interest and/or greater security.

The first of these deals, from Hovnanian Enterprises, Inc., expired Monday afternoon.

The deal, via Credit Suisse, targets seven outstanding issues in exchanges that offer bondholders new 18% senior secured notes due 2017 at prices between $0.40 and $0.47 on the dollar, depending upon the issue.

An informed source said that Hovnanian has until 9 a.m. ET Tuesday to extend the deadline on the exchange.

A late-Monday call to the company was not immediately returned.

A market source, not in the deal, said that the 18% interest rate on the new notes, which was announced in an October 27 press release, has possibly been overtaken by events.

"It doesn't seem so high these days," the source said.

Too early to tell

As to other distressed exchange deals in the market, from GMAC, Neff Corp., Realogy Corp. and Harrah's Entertainment Inc., all of which appeared in the past fortnight, market watchers said it is still too early to tell.

By early next week you would expect to hear some color, one syndicate official said Monday, adding that bondholders tend to wait until the last minute to decide whether to participate.

Meanwhile, preparations are underway for junk deals that could come as soon as the markets stabilize, high-yield syndicate officials reiterated on Monday.

"Everybody has mandates from people who want to tap the market," said one official.

"But the market just isn't there at this point."

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